Sirius XM Radio Inc. (SIRI) and its chief executive, Mel
Karmazin, gained a new lease on life Tuesday with Liberty Media
Corp. and its controlling shareholder and chairman, John Malone, as
the new landlord.
Liberty agreed to invest $530 million in the form of
high-interest loans - including $250 million on Tuesday - to Sirius
XM in exchange for stock and seats on the company's board.
In doing so, Malone blocked rival satellite mogul Charles Ergen
from taking control of satellite radio and gained his own path
toward a strategic partnership with the company. Shares of Sirius
XM lived to trade another day but remain underneath a crushing debt
load, a lack of profitability and slowing subscriber growth.
"With this investment, Liberty is making a statement that it
doesn't intend to let Sirius go bankrupt and they will help the
company meet its debt obligations in some way, shape or form," said
Frederick Moran, analyst with the Stanford Group.
"Karmazin has rescued Sirius XM from the verge of bankruptcy and
its shareholders now have a second chance to salvage some value in
their stock, but the company still faces meaningful, fundamental
hurdles in terms of growth and profit creation," Moran said.
Sirius XM's shares traded up 6 cents after the deal was
announced Tuesday morning to 17 cents. The stock has lost 97% of
its value in the last year on rising concerns about its debt
load.
Sirius XM warned investors last week that it faced a possible
bankruptcy filing as early as Tuesday if it couldn't reach a deal
to meet its mounting debt obligations, including bonds that mature
Tuesday and are majority-owned by Ergen, who was also negotiating
with Sirius XM over a deal for control of the company, according to
the Wall Street Journal.
While Ergen failed in his bid to control the satellite radio
industry, he presumably logged a handsome profit on his bond
holdings in Sirius XM as bankruptcy fears faded on Tuesday. The
company faces more debt maturities in May and December, but those
bonds rallied Tuesday amid renewed confidence that it will meet its
obligations.
Marc Lumpkin, a spokesman for EchoStar Corp. (SATS), which is
controlled by Ergen, declined to comment for this story.
The fortunes of satellite radio are now enmeshed in the U.S.
auto industry, where major companies like General Motors Corp.
(GM), Ford Motor Co. (F) and Chrysler LLC have deals to manufacture
cars equipped for Sirius XM's products and are facing possible
bankruptcies of their own. While subscriber growth for the sole
provider of satellite radio service has continued despite the
onslaught of a global financial crisis and economic downturn, it
has slowed considerably.
Miller Tabak analyst David Joyce predicts that Sirius XM can
reach break-even in free cash flow in 2010 and bottom-line
profitability several years after that.
"Sirius XM's ability to grow subscribers and revenue in a
difficult financial and auto market is indicative of how listeners
view this as a must-have service," Liberty Media Chief Executive
Greg Maffei said in a press release.
Stanford's Moran said Liberty's investment in Sirius XM is a
low-risk way for the company to gain an interest in its assets.
"From a financial standpoint, the terms are so favorable to
[Liberty] that they're essentially protected even if the stock
becomes worthless because they're taking a risk in the form of debt
obligations with high interest rates," Moran said.
Liberty's deal with Sirius XM will end up giving it 12.5 million
shares of preferred stock in the satellite radio company,
convertible into 40% of its common stock. Liberty will also receive
seats on Sirius XM's board, and Malone and Maffei are expected to
be one of the new board members.
Under the agreement, Sirius XM will get a $280 million senior
secured loan from Liberty, $250 million of which will be funded
Tuesday. The proceeds will be used to pay down $171.6 million of
debt due Tuesday, with the rest going to general purposes like
working capital.
The second phase of the plan provides a loan of $150 million to
XM Satellite Radio, acquired last year by Sirius after a torturous
regulatory approval process. Liberty also has offered to buy up to
$100 million of the loans outstanding under XM's current credit
agreements from lenders.
Liberty's deal marked a victory for Malone over Ergen, who
controls EchoStar and Dish Network Corp. (DISH) - the chief
satellite television rival to DirecTV Group Inc. (DTV), which is
majority-owned by Liberty Media. Both men are based in Englewood,
Colo., and have a reputation as tough, savvy dealmakers.
Karmazin, meanwhile, played Ergen and Malone off each other in
his own bid to salvage his substantial equity holdings in Sirius XM
and his legacy as the company's leader. Going forward, Karmazin
will be operating under the watchful eyes of Malone and Maffei,
which may pose a new challenge to Sirius XM's embattled CEO in his
long-shot bid to revive the company.
Liberty Media, whose assets are broken up into three tracking
stocks, said its investment in Sirius XM will be attributed to
Liberty Capital (LCAPA), and the deal won't affect the timing of
its planned split-off of a portion of Liberty Entertainment
(LMDIA), which holds the company's 52% stake in satellite
television provider DirecTV.
"[Liberty is] making a play on the satellite radio assets, which
could be a strategic benefit down the road to DirecTV, which
already delivers satellite radio access through its service," Moran
said.
Shares of Liberty Capital recently slipped 4 cents to $5.45,
while shares of Liberty Entertainment fell 4.1% to $18.30. The
company's third tracking stock, Liberty Interactive (LINTA), was
down 3% to $3.21.
Collins Stewart analyst Thomas Eagan said the sell-off in shares
of Liberty Entertainment is a buying opportunity.
"LMDIA is currently trading at a 30% discount to its net asset
value," said Eagan. "We expect this level to narrow as the spin-off
approaches."
-By Nat Worden, Dow Jones Newswires; 201-938-5216;
nat.worden@dowjones.com
(Kerry E. Grace contributed to this report)